Small U.S. Banks Struggle to Repay Bailout Funds — Watchdog

WASHINGTON—Hundreds of community banks in the U.S. are struggling to exit a government bailout program and may face spiraling costs that limit already constricted lending to small businesses, a government watchdog said Thursday.

“Despite the dramatic efforts to expedite the exit of the largest banks from [the Troubled Asset Relief Program], there appears to be no corresponding concrete plan for community banks’ exit from TARP,” acting Special Inspector General for the Troubled Asset Relief Program Christy Romero said in a quarterly report to Congress.

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The Bush administration launched the rescue plan in the autumn of 2008 at the height of the financial crisis. At one point, the bailout was estimated to cost as much as $700 billion. Ultimately, $432 billion was disbursed through a handful of programs and much of that has been recovered.

The Treasury Department invested $204.9 billion of TARP funds in 707 financial institutions — the 10 largest banks accounted for $142.6 billion of the program.

Many companies, including the largest, have paid the government back. Another 137 banks swapped TARP funds for the Small Business Lending Fund, a program that offers lower dividends, removes executive-compensation restrictions and TARP’s stigma, the report said.

But Romero faulted the Treasury Department for not doing more to help the remaining organizations to exit TARP and worried that the final process will end up “ad hoc and inconsistent.”

TARP banks face having to pay the Treasury Department higher dividends — to 9% from 5% starting in the fall of 2013 — if they remain in the program. The inspector general warned that, when the dividend rate increases, many banks will remain unable to access new capital.

“A growing number could default on their obligations to taxpayers, be forced to consolidate on very unfavorable terms, or even possibly fail,” Romero said in an Oct. 11 letter to the Treasury Department that was first made public in Wednesday’s report.

Already, 193 banks have missed interest or dividend payments to the Treasury Department.

In a response to Romero, the Treasury Department said failure to pay dividends wouldn’t result in a bank’s default, or force it to consolidate or fail.

“We continue to explore the best ways to manage our remaining investments in order to promote financial stability and maximize taxpayer recovery,” said Assistant Secretary for Financial Stability Tim Massad.

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